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1973: What Happened?
Some recent posts about Chelsea Clinton’s reference to 1973 brings me back to a remarkable chart. Average real wages vs labor productivity. Since the ’40s, real wage growth was in lockstep with productivity growth. Then something changed dramatically in 1973. Starting then and ever since, real wage growth has disconnected from productivity growth.
What happened in 1973? What paradigm shifted under our feet? And it is a paradigm shift. The break from what went before is crisp and clear. But what caused it? Women entering the workforce? The dawn of computers and automation? Energy shocks? What?
Looking for ideas.
Published in General
My best guesses are women’s entrance into the labor market, massive low wage immigration, automation, the relative decline of the family as a middle class creation unit and the beginnings of entire classes of people getting their income from the government as a neverending entitlement.
A couple things leaped into mind, females entering the workforce is one, soldiers returning from Vietnam, Nixon’s wage and price freeze of 1971, Watergate, the oil embargo, the dawn of the entitlement state, etc.
But none of those reasons really explains the flattening of wages while we see the continued upward trajectory of productivity. And the wage line just goes so flat so fast, something fundamental happened. So I suppose we need a guy like @jamespethokoukis to help, sure the graph master himself can solve this riddle?
Inflation.
Roe v Wade
Gee . . . I entered the job market in 1973. (My timing was great.)
I’m guessing that all those factors impacting the supply of labor – women entering the labor force, immigration etc – aren’t it. If there was an excess supply of labor, and it dove down wages, I’d expect to see a concurrent drop in labor’s productivity. No? Wages would be lower, true, but still in tandem with lower productivity. And that’s not the case. Productivity continued to grow.
Ah Ha! Ok. ‘Fess up. How did you mess us up? Were you in collusion with the Russians?
Civil rights favoritism and normalization of lawsuits? Perhaps compensation has become ever more about warding off legal threats and less about attracting good workers.
Inflation might explain a greater portion of financial resources being tied up in production. But so would a cultural shift in production strategies (ex: invest more in stuff, less in people).
Or perhaps the shift toward service industries and consumer electronics defies the old model of measurement.
Explain this to me. It isn’t making sense.
If you have more people to do the same work, wages drop while productivity stays the same.
If productivity goes up, could it not be because more people are doing the work and the high supply of labor keeps wages low?
I’m wondering about that. We are looking at ‘real’ wages so inflation is one of the hidden variables in the chart. Excess inflation? Is there such a thing? Certainly the Breton Woods agreement ended in phases between 1968 and 1973.
So this matches up to LBJ’s social-welfare policies, women entering workforce, the major altering of immigration policy in 1968, and the rise of computer tech?
It’s delayed for LBJ, women, and immigration and predictive for computer tech. I wouldn’t expect a lot of market penetration until the 80s.
I am curious too. I’d like to read something by an economic scientist with expertise in the field. Someone who knows what he is talking about.
I’m no more interested in what people who are completely ignorant of economics guess is the explanation than I would be in the speculations of a New-Age mystic about the causes of leukemia and the curative power of crystals.
I am also not very interested in what economists who cling to pre-scientific theory (Classical economics) think about the explanation. With respect to macroeconomic questions like this one, the theories of Classical economics are irredeemably flawed, because they are founded on violations of scientific method, in particular of causal realism and methodological individualism. They were thrown on the trash heap of intellectual history during the scientific revolution started by Menger and others of his era.
They should have stayed there. Instead they were revived by Keynes and others, not by logical arguments and scientific advancement, but through Alinskyite bullying by leftist ideologues in academia and in government; the hiring and firing power of expanding, despotic governments (led by the post-WWII USG); and the lack of courage of the vast majority of the true economists of the time.
Mainstream macroeconomics in our time is a throwback to the pre-scientific, Classical era of economics. Today, even most pro-market second-hand dealers in economic ideas were brainwashed by the inter-related junk-scientific theories of mainstream economics, like the Circular Flow, static analysis of the economy, causation by statistical aggregates of economic data, and “mathematical” economics.
There is always so much going on in a global economy that trying to isolate causes and effects is impossible, but there are some things that were large enough to take note of.
US manufacturing had a de facto monopoly going from war production to production of everything for war devastated economies of Europe and Asia. Then Europe and Japan recuperated and built modern highly automated manufacturing, the Asian tigers entered production of labor intensive goods and immigration, legal and illegal, grew rapidly from the Depression then war time low levels. The war on poverty raised welfare, minimum wage laws excluded unskilled workers keeping union wages up and expanding welfare. Our major manufactures and their unions didn’t adapt. That’s what monopolies do over time. Big corporations continued to pay their managers outrageous salaries and benefits even as they lost market share, they found it easier to just move south or abroad instead of taking on their unions or cutting their own salaries and benefits.
There was another factor that’s never commented upon. High marginal tax rates and high corporate profits changed the nature of the stock market and board room culture. Had corporations paid profits out as dividends, the return to a high income stockholder would have been 3 cents on the dollar, so management switched from profit maximization to cash flow, from profits to gross sales, from product improvement and innovation to advertising and sales. Tax laws rewarded takeover as old capital equipment could be depreciated even after recapture requirements. Stockholders just looked for capital gains and those with large portfolios could clean up losses to match with gains from companies they wanted to take profits on. Or sit on unrealized capital gains, borrow cash on margin if necessary and pay little or no taxes. These ridiculous tax rates and laws were wedges between boardrooms and investors that changed boardroom culture. These same corporations embraced the regulatory state as a way to limit competition, so the regulatory state which had grown during the war continued to grow rapidly after the war. In short, a number of factors occurred that weakened market competition and led to bureaucratization in and out of government. The administrative state got rolling. The fix is known but one party is dedicated to preventing it and half the leadership in the other doesn’t understand or chooses not to understand.
I graduated from high school. Potential causal link established . . .
The graph measures productivity per unit of labor.
Is the wage growth standardized or is that in nominal dollars?
Logically the easiest explanation is women entering the work force. If you essentially double the workforce you divide wages in half. Coupled with very low inflation starting in the 80s the lack of increase isnt felt, and natural technological progression coupled with a free trade regime means the quality of goods owned keeps increasing even while wages stay stagnant. So wealth does increase and certainly on a household basis. Because now you have two earners and you own better stuff.
When did the impact of technology kick in?
I saw an interesting thing about the guesses of the uninformed. Each one is almost random. But the average of lots of guesses converged to the correct answer.
People were asked to guess the number of marbles in a jug. Some were wildly big or small … a five year old guessing ‘a million’ or another guessing “fifteen” But after a few hundred guesses, the average of all the guesses converged to within + or – 1% of the actual number.
It’s what makes markets so efficient.
Real wages, constant dollars
I guess my answer would be yes to pretty much every thing suggested. There may not be one cause. I think this may be more the starting of the modern economy.
Inflation probably played some role. There were increases labor with women entering the work force. Technology increased productivity and first started displacing employees (it was like 1970 when the first ever ATM was installed).
Germany and Japan had recovered from the war and had growing economies. This time was about when our global trade changed and we started seeing the first real trade deficits.
https://tradingeconomics.com/united-states/balance-of-trade
These two key factors created an obsession with short term stock price, a lust for seemingly pointless mergers to create larger boardrooms and higher CEO salaries. It fostered a management style that sought to sustain (at the least appearance of) productivity largely by stifling wage growth and also saw the dawn of the the Jasper B. Biggley/Jeff Immelt Epoch in which CEO compensation growth begins to accelerate. The JBBJI Epoch is thought to have peaked when Jeff Immelt could no longer order a second GE corporate jet to follow his GE corporate jet in case the first corporate jet had mechanical issues or might otherwise be delayed. However the epoch has by no means ended yet.
But that doesn’t explain your assumption that a decrease in wages owing to a larger labor supply would lead to a concurrent decline in labor’s productivity. Women and immigrants are talented and hard working. Why would their entrance into the lab0r pool lead to a concurrent drop in productivity commensurate with the decline in the increase in wages?
The price of goods and services went up but actually what happened is the value of the dollar declined. Wages did not keep up with the increase in prices.
Can you make that graph bigger? Or provide a link?
Let’s see, the first Baby Boomers turned eighteen in 1964. They turned 22, or graduated from college, in 1968. Huge numbers were entering the labor market. It took a few years for them to glut the labor market with the very large wave of new workers coming in because of the labor shortage caused by the smallness of the previous generations who had fought in WWII or been born during the Great Depression. Add into that the growth of automation and other factors mentioned above, and we see extreme competition for jobs starting in about 1973.
I was thinking about applying increasing doses of labor to a fixed capital stock. ie hiring extra workers because I can get them cheap, but no additional machines. Productivity per unit of labor declines.
And even if you apply existing labor and capital in equal doses then productivity per unit of labor remains unchanged.
Lots of discussion at the leftist EPI.
I would like to know what happened prior to 1948. Alternatively, why should there be any correlation between real wage growth (insofar as that aggregate means anything) and productivity growth (which I’m pretty sure is an aggregate that means virtually nothing)?
Assuming the graph is accurate, it’s certainly easy to imagine the dramatic increase in available workers represented both by women entering the work force and the continuing stream of baby boomers coming of employable age as being the cause.
I suspect there is a multiplier effect with women entering the workforce, as it decreased their presence on the home front, leading to an increase (I speculate) in both fast food and daycare utilization. These are both low pay, low skill jobs, and, at least in the case of fast food, there are an awful lot of them. That alone might account for a significant shift in average hourly compensation.
Basically, we took women who were doing unpaid menial labor at home and sent them into the workplace, causing a bunch of other people to take on low paid menial jobs that suddenly show up on the wage charts.
A hypothesis, anyway.
I read a very cogent paper back when I was young and numerate which examined the growth of low wage jobs which were caused by the entrance of women into the labor market. Started from the commonsense assumption that the wages paid to replace basket of domestic labors the women entering the workforce were in part abandoning would be lower than the hourly wages of the jobs the women were taking. Actually it first examined that assumption, finding it largely but not universally true (women entered the workforce for a set of reasons), and then established that each woman entering the workforce created a little less than one FTE of low wage labor.
Illegal immigration, like drugs, is a demand side phenomenon after all (absent a supply of welfare or catastrophe).
Further, the tail end of the Baby Boomers were graduating from college in about 1986. By this time, there was a serious labor glut. You will note that the compensation is almost trending down a little until about ten years after that. That gave time for the Baby Boomers to all get employed and for the labor market to feel the shortage of Gen X, or the Baby Busters. That was when the trend line started back up.